The inter-agency Development Budget Coordination Committee has also increased its 2007 average inflation target to 4 percent to 5 percent from 3 percent to 4 percent, said Gil Beltran, an assistant secretary at the Department of Finance who sits on the committee.

The previous targets set three years ago under the government’s Medium-Term Philippine Development Plan were widely seen as outdated due to unexpectedly sharp rises in inflation driven by recordhigh oil prices.

"We did not anticipate three years ago that oil prices will behave like this," Beltran told Reuters, adding that the 2007 forecast would be revised again.

"The 2007 figures will be adjusted later once we determine what 2006 will look like," he said.

The central bank expects average inflation to reach 7.6 percent to 7.9 percent this year from 6.0 percent in 2004, with added pressure on prices coming from a broader sales tax due to take effect from Nov. 1.

It expects inflation to hit 7.5 percent in 2006 and last week raised its overnight interest rates by a quarter percentage point to tackle growing inflation risks.

The central bank’s overnight borrowing rate is now at 7.5 percent and its overnight lending rate at 9.75 percent.

The Supreme Court last week cleared all legal hurdles to the expanded value-added tax (VAT), which is aimed at cutting the Philippines’ heavy reliance on debt by shoring up chronically weak revenue collections.

The new law ends VAT exemptions on a wide range of goods and services. The VAT rate will also rise to 12 percent in January from 10 percent now, if President Gloria Macapagal Arroyo uses the authority given to her under the law.

Diwa Guinigundo, deputy governor of the central bank, told reporters over the weekend the expanded VAT is expected to push up the average inflation rate this year by 0.11 percentage points.

The measure will push up 2006 average inflation rate by 2 percentage points assuming the rate is increased, Guinigundo said.